Why Car Dealers Should Supply Vehicles to Uber and Lyft Drivers

How could Uber&rsquo;s attempt to lease vehicles to its drivers lose an incredible $9,000 per vehicle and shut down, despite such overwhelming captive demand?&nbsp;&nbsp;

John Possumato | Nov 21, 2017

At least until autonomous vehicles take over the industry (and that timeline is, at best, conjecture at this point), it seems ride-sharing companies (Uber and Lyft being the most prominent) need an ever-expanding network of drivers, and those drivers need vehicles.

To satisfy this vehicle need, Uber, with the lion’s share of the market, created its own internal division, Xchange Leasing, to supply on-demand new-vehicle leases by the week or month. All a driver needed was a bank account and a downpayment, and the funds for the vehicle were withdrawn weekly from their Uber earnings.

Sounds great, but like many new-age enterprises where deficits are funded by investor capital and lofty goals (as opposed to bootstrapped earnings), it never really worked.

The economics didn’t work from the start for Uber drivers. Jjust check the blogs and message boards on the lease pricing. And amazingly, even with high charges ($200-$400 weekly) for these vehicles, it didn’t work for Uber either.

When Uber announced problems with Xchange Leasing in August, prior to its shut down in late September (it apparently first put it on the market, but really, who was going to buy this thing?), it was suggested that the enterprise was losing upwards of $9,000 per copy on about 40,000 leases.

That’s roughly $360 million in losses in less than two years. If this was a company other than Uber, it might have caused real financial damage.

One would assume equally dismal financial results were garnered from Uber’s arrangement to provide vehicles through their Enterprise Rent-a-Car program, as that two-year-old program is apparently shuttering as well.

So what does that tell you? That Uber piles on the overhead because it has so much cash on hand? Maybe. That the company suffered some serious management setbacks? Undoubtedly. But other evidence suggests there is more to it than that. Some underlying economic fundamentals are at work.

From what can be surmised online, there is still an overwhelming demand for potential drivers to secure ride-sharing vehicles.

Even the peer-to-peer services are attempting to fill this need, but demand for the price-effective vehicles outstrips the supply in major cities. So you have to ask why Xchange leasing was such a financial disaster?

The peer-to-peer situation reveals the answer. It’s economics 101. First, on the demand side, the price level I can receive is relatively inelastic to supply the ride-sharing market. Second, it’s “Gresham’s Law” at work, only in this case, instead of “bad money crowding out good,” its high mileage career ride-sharing drivers crowding out the vast majority of lower-mileage casual drivers, as far as demand is concerned. I will explain.

On the demand/pricing side, from what I’ve found, averaged across markets, is an upward limit as to how high the daily or weekly price will cap out at – the most the ride-sharing market will pay for a vehicle, regardless of the vehicle.

While this may be a high average payment from an ownership perspective (say about $200 a week), it is low when considering what needs to be charged when new-vehicle depreciation is factored in with ride-share utilization.

Again, while that seems like a lot of money per month, and, indeed it is, as insurance on the vehicle is priced extra, it is a finite top-end number. In most cases, the demand/price curve does not change whether you fulfill this need with a new or relatively new vehicle or a 3- or 4-year-old vehicle.

Bottom line, the maximum revenue a mainstream ride-sharing driver gets is not going to change, whether the need is supplied with a new or 5-year-old model.

That’s the first rule here. Because the mainstream maximum rental rate is inelastic, supplying vehicles to the ride-sharing market is a used-car game for those who have maximum ROI in mind.

I can get $35 a day/$200 a week and keep my 4-year-old, $9,999 Focus rented all month long at those rates (I experimented with this and did just that; more on it in a minute) or I could offer up a brand new ’17 Focus Titanium that costs triple that amount to the market, and, well, get the same amount.

It’s clear how I make money at this. Use older used base-model vehicles. Try to fill this need with brand new or nearly new cars, and net return will be much lower or even negative.

Try doing this on an Uber Xchange new-vehicle lease (where mileage is a direct deduction against projected residual), and, well, we know what happens.

Supplying vehicles for car sharing is a used-car play, pure and simple, even for peer-to-peer, non-ride-sharing-type clientele. Few will pay more for a new vehicle even on the casual-use side (there is a market there perhaps, but a limited one). In supplying the market though, it has to be older used vehicles to make economic sense.

This is why car dealers are best suited to supply the vehicles to this market. Until the manufacturers switch their primary focus from new-vehicle sales to merchandising their used vehicles, they either won’t be interested, or will attract only a small consumer niche with programs such as Cadillac’s Book.

Traditional rental car companies could fill this need, but, again, until their fleet is stocked with 3 to 4-year-old vehicles (and they are equipped to handle all of the extra, non-warranty servicing that entails), I don’t see them as the optimum fulfilment source. It’s the dealers’ market to grab because they can control and service the right supply.

The second factor at work involves another old economic maxim, a variation of Gresham’s Law of bad money crowding out good. But in this case, it’s career drivers crowding out casual drivers when it comes to the demand for ride-sharing vehicles.

About 85% of Uber and Lyft drivers are in the casual category. They drive, say 10 hours and put on a few hundred miles a week opposed to career drivers who do it full time 1,000 miles (1,600 km) or more a week.

But just as bad money finds itself spent first in a market, those career drivers will be the first ones to jump on a program such as Xchange Leasing. It caters to them, and so they will be a disproportionate user of the service. Unless you prepare for this, it won’t even out.

Dealing with this is simple for a dealer though. Put a daily-mileage cap, albeit a higher one, on all car-share units, say 100 miles (160 km) a day, with a per-mile charge above this limit.

This won’t discourage any casual ride-share driver, or even a partial career one (700 miles (1,120 km) a week is a pretty high number, but in no way will immediately kill the value of a 3- or 4-year-old used car the way it will a brand new vehicle). It will restrict the hard core, 1000-plus mile a week folks.

All of this data points to the same conclusion, that both retail (to the general public) and wholesale (to the Uber and Lyfts of the world) car sharing would be best and most economically provided by franchise and independent dealers.

Having had this idea and being a lifelong car guy, I had to test it out for real. (I’m not happy unless I’m buying/selling/renting/trading vehicles).

I bought a test vehicle, retail, right off a dealer’s lot, a $10,000 ’14 Focus SE, and offered it up privately for car sharing. In four weeks, and I generated more than $750 in revenue, and it’s accrued about another 3,000 miles (4,800 km). I intentionally bought a lower-mileage Focus to prepare for this; they are around. Granted this is only one vehicle, but it was rented the same day I bought it, to an individual that drives for Uber, and he has kept the vehicle since day one.

Demand is clearly there, and, indeed, what dealer would not jump at $750 a month net in revenue, on a $10,000 retail unit (in fact, I’m sure the dealer made a profit, so the cap cost was less).

Unleashing the power of the dealer would change things dramatically in the mobility-as-a-service marketplace. It would put this segment of the industry squarely where it belongs from an economic and servicing point of view: in auto retailers’ hands.

Everyone who knows me also knows that when I feel this strongly about something, and it involves dealers, I dig deeper and explore all the angles of operation from a business perspective. The devil is in the details.

So I am investigating all of the pieces to this puzzle (insurance coverage, culture training, best practices), as the information will be valuable to dealers who might want to dip their toe in the car-sharing business, either by providing temporary vehicles to retail customer who may need an extra vehicle now and again (or who may not qualify to finance or lease a vehicle currently) or by jumping on a more immediate opportunity by providing vehicles for those who want to try the ride-sharing business through companies like Lyft or Uber.

My theory is if indeed private individuals are now buying multiple vehicle and renting them out to satisfy the overwhelming immediate need for vehicles in the Lyft/Uber world and making serious coin doing so, car dealers who are in the business of providing transportation can do this in serious volume. They can do it better, faster, cheaper and create an additional substantial profit center for the store.

Does this seem logical? What do you think? Have questions? Call or email me. This is an evolutionary dealer business opportunity I enjoy talking about.

John F. Possumato is an attorney, the founder of Automotive Mobile Solutions, a graduate of the University of Pennsylvania’s Wharton School of Business and a mobile marketing expert. He can be reached at [email protected] and 856-577-2763.